Executive Summary:
Marketers take heed: strong relationships with current customers may lead to less adventuresome, more complacent product development efforts. Alternatively, if threats loom on the horizon, such as heightened competition or economic downturns, organizations tend to shift gears and press forward more boldly. Slack resources-an excess of capital, labor or a hefty customer base-can affect whether a firm incrementally strengthens existing competencies (exploitation) or breaks through with something new in its product stable (exploration). New research* by SMU Cox Marketing Professor Glenn Voss and co-authors, forthcoming in Academy of Management Journal, shows how environmental threats and slack resources can combine in such a way that influences whether a firm innovates or incrementally adapts.
The authors studied the theater industry during a time of great turbulence. Voss recounts, "We did this study at an opportune time in 2003, when most of the theater industry was struggling post-9/11. People were not congregating and attendance dropped precipitously across 2002 and into 2003. Many theater managers were perceiving environmental threat." During that period, research findings did not show exploration go up or down. There was variation across board, much of which was related to the type of slack resources an organization had.
Nonprofit professional theaters face unique tensions between their ethos which emphasizes artistic values versus pressures to sustain financial viability. These competing demands create challenges in balancing artistic experimentation fraught with uncertainties versus capitalizing on known artistic successes that assure more predictable returns. Studying nonprofits in this context has lessons and implications which apply to for-profit businesses as well.
The Case of Slack Resources
Marketing Professor, Voss' research extends into the general strategy area, particularly when speaking of operational types of slack. Voss finds customer relationship slack most interesting. "In prior research, we found that customer relationship slack (rather customer relationships) tends to inhibit exploration and innovation. This is a finding that marketers don't really like to hear." But findings in the management literature suggest that it is true, too. With their stable current customers, firms do not want to rock the boat and do new things, being content with the present. Firms become less dynamic and more risk averse.
In the research context of theaters, strong relationships with customers that provide a known revenue cushion, e.g., subscriptions, pre-paid services, or a contract, tend to rein in innovation. Voss says, "Firms with strong customer relationships are engaging in less product exploration. If there are threats in the environment such as economic downturns or fierce competition which jolts them out of complacency, then they are willing to do some level of exploration to counter environmental threat."
Financial slack means that the organization has financial resources beyond what is needed. These cash-rich firms are not too concerned with operations because of the resources on hand; they can counter tribulation. Past research has produced results on both sides. The financial resources provide the opportunity to take risk; conversely, having money in the bank breeds complacency.
If a firm has financial slack, it may not be motivated to explore unless there are threats in the environment. Voss conveys, "Threats kick us [the firm] into gear, otherwise we'll be passed by. So it is the external environment, the turbulence, which gets us into gear, provided the firm is able to do so." A good example of this could be major oil companies with large cash reserves. With high oil prices and climate change on the public's mind, firms are having to consider and invest in alternative energy sources and find new processes considered 'environmentally-conscious.' Thus threat is promoting change, literally, more exploration (of a non-traditional type) in the oil and gas industry.
With human resource (HR) slack, or excess labor, the tendency is either to keep doing the same things or make slight modifications. According to Voss, companies that explore tend to remain lean and outsource noncritical activities. It allows them greater flexibility in identifying the best resource for exploration, because exploration by definition is constantly changing. And while it's changing, the resources necessary may also need to change. "If a firm has many full-time positions and is on the bloated side, then it is difficult to identify the best resources for exploration and bring it in-house. You will have to go internally and work with what you have, with those who may be used to the status quo, and not want to change things up," Voss re-affirms. Thus HR slack leads to more product exploitation, i.e., incrementalism.
Implications and Practices
The customer relationship findings echo strategy findings from 12 to 15 years ago, particularly with innovation. Anecdotal evidence suggested that firms that listen too much to their customer are not successful at innovation. If they are overly focused on current customers' wants, then the new technology which leapfrogs into a new product market area will be missed.
Many marketers believe that the customer relationship story has to work into their product development efforts, etc. But the opposite may be true when firms have strong customer relations; they don't engage in exploration and innovation. Voss says, "The picture that emerges for me is that too great a focus on current customers can not only lead to complacency, but perhaps can instill a culture where we don't want to innovate too much, wishing to maintain current customers, and having a belief that our current customers don't want great change either.
Voss says there is greater recognition that marketing skills, expertise, and capabilities create a certain kind of differentiation-call it brand differentiation, marketing differentiation, or image differentiation. This form of differentiation is largely perceptual differentiation. It is not based on any real capability other than a marketing capability-'to convince our customers that ours is better than our competitors' (even if they are the same products basically). But there are a lot of firms that do this well, and people buy into and support those brand names. Voss cautions, "The flip side of those capabilities, when driven to achieve success in that way, is the potential for it to detract from the firm's ability to achieve true performance superiority based on innovation or developing higher quality products."
Some management theorists argue it is important to separate product development and marketing activities into autonomous organizational entities. Focus on current customers and products in one entity; then have another entity for basic research to produce leapfrog technology that may in fact cannibalize current products. "From the marketing differentiator camp, there's a concern with new technology that does away with current products," Voss mentions.
Big pharma understand the importance of delineating activities. Pharmaceutical firms are really marketing companies that farm out the research and development to smaller R&D labs, creating the new products for big pharma to market. Microsoft has a similar problem. While facing new competitors, they must remain loyal to their old technology because they have to provide backward compatibility for all of their new software products. "They are now starting to look vulnerable," Voss states. Slack, manifesting in some form, may be inhibiting a brighter future.
* "The Effects of Slack Resources and Environmental Threat on Product Exploration and Exploitation" by Glenn Voss of SMU Cox School of Business, Deepak Sirdeshmukh of North Carolina State, and Zannie Voss of SMU Cox School of Business and Meadows School of the Arts is forthcoming in Academy of Management Journal.
Written by Jennifer Warren. |
